Shanghai’s Solar Carnival Belies the Struggle for Survival in China’s Flagship Clean Energy Industry

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(Bloomberg) — Visitors to the world’s largest solar energy exhibition could be forgiven for not realizing how grim conditions are in China’s flagship clean energy industry.

Hundreds of thousands of people flocked to Shanghai’s largest convention center last week to attend the city’s annual solar gathering. There was a carnival atmosphere. They were greeted by corporate mascots in panda and astronaut costumes, and presenters in ball gowns presented wheel of fortune spins. There were stalls selling popcorn, ice cream and cocktails, and video game competitions were held on giant screens that reached up to the cavernous ceiling.

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Behind the scenes, executives are worried about the crisis gripping the sector. At home, prices have collapsed after rapid expansion created far too much capacity, forcing many companies to sell at a loss. Abroad, China’s dominance of global supply chains is being tested by an explosion of protectionism. And the rapid spread of solar power, the best success story in the fight against climate change, is now facing resistance as power grids are overwhelmed by the flood of energy that is available during the day and disappears at night.

“We are in a deep downturn,” said Amy Song, vice president of solar material maker GCL Technology Holdings Ltd., in an interview with Bloomberg TV on Friday. “Hardly anyone is making money right now.”

The rise of solar power over the past two decades has been meteoric. The industry has gone from a niche sector for environmentalists to the dominant source of new energy on the planet. Last year, 445 gigawatts of solar panels were installed worldwide, more than all other energy sources combined in one year in human history. Most of it was manufactured in China.

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That has fueled the growth of multibillion-dollar companies that are now comparable to the oil and gas giants. But it has also created the conditions that have plagued commodity markets throughout history. China’s solar companies have boomed, and now they are headed for a bust that could dwarf previous industry slumps.

A surge in demand that began three years ago drove up prices and enabled ambitious expansion plans that created oversupply. Chinese companies could produce 1,154 gigawatts of solar panels by the end of 2023 – more than double the capacity at the end of 2021. Forecast demand this year is only 585 gigawatts, according to BloombergNEF.

The rapid expansion is a typical “tragedy of the commons.”

The companies looked after their own interests without considering the impact if all their competitors did the same, said Gao Jifan, chief executive of Trina Solar Co, the world’s third-largest solar module maker. They were supported by local governments eager to meet their growth targets and banks eager to lend them credit, he said.

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Gao was one of several executives who last week called on the central government to intervene to help the industry get back on its feet. The list of options proposed included regulating which new factories can be built, cracking down on less efficient plants, limiting price discounting and encouraging consolidation.

Meanwhile, too many factories are bidding to supply too few projects, which has pushed prices to record lows. A recovery is not expected until 2025 or 2026, says BNEF analyst Youru Tan. Industry managers warn that bankruptcies are looming.

Solar power’s biggest backer is Beijing. The industry is one of the government’s “new productive forces” that it hopes will help the economy move away from decades of growth fueled by the real estate market, low-cost manufacturing and government investment. Other clean energy sectors, such as batteries and electric vehicles, are in the same situation.

Government support, which has included generous subsidies in recent years, has helped build a world-leading industry. Chinese companies control more than 80 percent of capacity along the entire supply chain, irking foreign governments that do not want to rely on a geopolitical rival for energy supplies and want some of the industry’s jobs for their own people.

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US President Joe Biden last month tightened trade measures against solar plants from China. His administration is now also targeting factories in Southeast Asia that are seen as fronts to avoid tariffs. India has also introduced import tariffs, and there are calls in Europe to follow suit.

Chinese companies are now looking to invest abroad and win customers in countries that have erected trade barriers, including the United States, after the Biden administration passed a bill in 2022 to create incentives to boost domestic clean energy production.

Despite the gloomy outlook, there is reason for optimism in the industry. Demand will continue to grow over the next decade, contributing more than any other source to decarbonizing the world. And healthy profits in 2021-2023 mean many companies are sitting on large cash reserves to weather the downturn.

However, the industry faces problems of both a technical and commercial nature.

China installed a record 217 gigawatts of power last year – more than ever before in the United States. Solar energy now accounts for 22 percent of the country’s total power generation capacity. But the irregularities in solar radiation are putting a strain on the power grid.

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Hundreds of small towns have stopped approving new rooftop solar projects, and solar panel usage hours across the country are getting shorter as the grid rejects their power because there isn’t enough room for it during the day. The government has recognized the problem and recently relaxed regulations to allow installations in areas that otherwise have too much power.

To tighten the belt

The broader solution is to build more power lines around the world that can transport excess clean electricity to where it is needed. More storage, especially in the form of batteries, is also needed. But when you add in these costs, solar power has to become increasingly cheaper.

At the moment, the industry is focused on austerity measures. Longi Green Energy Technology Co., once the world’s most valuable solar manufacturer, announced earlier this year that it would lay off thousands of workers. Other companies have halted production. Smaller manufacturers have been forced to delist their shares.

Wu Fei, chairman of Wuxi Suntech Power Co., compared China’s solar industry to home appliance makers 15 years ago, when about 300 companies vied to sell washing machines, refrigerators and air conditioners across the country. That industry has consolidated to just a handful of players, he said, and the solar industry is likely to follow suit.

“Today’s restructuring in photovoltaics has only just begun,” he said. “The second half of the year will be even worse.”

— With assistance from Kathy Chen, David Ingles and Annabelle Droulers.

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